As Friday’s jobs report revealed, there’s a lot going right with the U.S. economy right now.
Unemployment, though it ticked up a touch, is still a low 4 percent. Real GDP growth for the second quarter, juiced by the stimulus from the tax cuts and other government spending, is expected to come in close to 4 percent. Though the monthly numbers are jumpy, there was a nice pop in labor force participation last month, signaling the possibility that the hot job market is pulling in heretofore labor market sideliners. If so, that’s an important sign that there’s more room to run in this job market than many economists believe to be the case.
Yet, given that we’re starting Year 10 of an expansion with such low unemployment, there’s more nervousness out there than you might expect. A lot of people, if not disgruntled, are not particularly eased. Why is that?
First, even though the expansion is long in the tooth (since 1990, the average expansion has lasted eight years), there are still groups of people who have been left behind. For example, mid-level wage growth isn’t quite what we would expect given all these labor shortages we keep hearing about. As economist Elise Gould points out, anecdotes of widespread labor shortages are contradicted by the lack of much wage acceleration. True, employers almost always complain about labor shortages, but if firms have been struggling to attract more workers, why aren’t they raising wages more quickly to draw more people into the labor force or away from their competitors?
To be fair, mid-level wages, before accounting for inflation, have picked up a bit, to about 2.7 percent per year. But here’s the thing: Consumer inflation is also running at that level, so real wage growth for middle-wage workers has been flat over the past few years (see figure below). According to my estimates, the average yearly wage growth since 2017, inflation adjusted, for the 80 percent of the workforce that’s blue-collar in factories and non-managers in services is a big, fat zero. That’s quite a deceleration from the 2015-2017 average real growth rate of 1.6 percent.
So, my first entry in the watchlist (i.e., things to watch out for) is flat real-wage gains for significant swaths of workers.
Next, the trade war.
I’ll have more to say about this for my Monday column, but for now, consider the following overarching point that, as I see it, undermines Team Trump’s strategy. Globalization is so embedded in our domestic production and consumption that when you tax imports, you hit U.S. companies and consumers. Volvo is a Chinese-owned company, headquartered in Sweden, with plants in the United States. The biggest BMW plant in the world is in South Carolina. Every American car, based on the parts inside it, is, to some degree, an import.
This implies that a tax on imports is a tax on “intermediate goods” that go into U.S. production with the potential to slow domestic growth and raise prices. What we’ve seen so far, to be clear, is not enough to move the aggregate growth or price indicators very much, but there’s enough concern here to warrant placement on the watchlist. After all, I just showed you that working-class wages are failing to outpace prices. If the trade war raises prices enough, that problem will be exacerbated.
My next watchlist entry is the buildup in public debt that I wrote about this week. For one, this stimulus is goosing the growth rate and nudging the unemployment rate down, but, at least as per current legislation, it begins to fade in 2020. Most forecasts have the growth rate settling back down to trend, around 2 percent, next year and to below trend, around 1.5 percent, in 2020.
I wouldn’t give too much weight to those forecasts, but there is a case that a recession looms out there somewhere. And with our debt levels high and rising, Congress is highly unlikely to apply the necessary fiscal policy to offset the downturn. So, our highly unusual amount of public debt at this stage of the recovery ranks high on my watchlist.
What’s not on the watchlist?
While some economists are worried about the possibility of overheating, wherein a too-tight job market leads to unsustainably high wage and price pressures, I don’t share that concern. Yes, inflation and interest rates are rising, but they absolutely should be at this stage of recovery. But if you look at the distribution of the growth we have seen over the past few years, it’s clear that firms are still far too successful, from the perspective of the working class, at holding back labor costs to protect their profits. So I say bring on the tight labor market. In an economy that lacks the union presence to ensure a more equitable distribution of growth, the persistently tight labor market is the working-class person’s best, if not only, macroeconomic friend!
Moreover, the Federal Reserve has ample weaponry against overcapacity: It can go from brake-tapping to brake-slamming if need be. That is, since 2016 the Fed has been slowly raising the interest rate it controls to “get ahead of the growth curve.” But the Fed could hasten this rate-hike campaign if need be.
So, forgive me for the usual economic on-the-one-hand, on-the-other-hand routine. But while we should enjoy the growth and the tight labor market we have, we should also be stretching our necks as best we can to see what’s around the corner.